Making Ethics An Essential Part Of Doing Business

The challenge of building an ethical climate in businesses is not new. However, in the last decade, the importance of such a climate, and the heavy costs of ethical transgressions, have been prominent in the daily headlines. They reveal the impact of decades of ethical mismanagement that goes beyond explicitly breaking laws. Rather, the issue is the systematic failures of businesses in developing, executing and maintaining an infrastructure that fosters ethical decision-making.

By ethical decision-making, we mean the ability of employees to recognize and detect decision situations that risk damaging operations or investments, negatively impacting shareholders and other stakeholders, or harming the business’ reputation.

Business ethics are complex; we cannot trivialize the work of developing a culture of integrity. Nevertheless, here is a list of key guidelines that managers in companies of any size can use to build an ethical system of “doing what is right.”

The prerequisites
Start at the top — You are the ethical leaders of the business. Chief executive officers must formally commit to incorporating ethical behaviors as a guiding principle within their business’ mission statement and goals. Ethical core values should be consistently communicated, embraced and reinforced to stakeholders.

Know key laws and regulatory issues — Employees must know relevant laws such as Sarbanes-Oxley, Occupational Health and Safety, intellectual property, etc., that impact their responsibility areas. Many employees should know labor laws to avoid discriminatory behaviors. And, they should know that violating laws or trying to “get around them” will not be tolerated.

Standardize policies and procedures — This is where ethical lapses frequently occur, especially in small businesses. There is a tendency to ignore or resist putting in place formal codes of behavior because they can make the members of an entrepreneurial enterprise feel constrained, or worst of all, bureaucratic. But without written common rules and procedures for such areas as itemizing expenses, accepting gifts, incentive programs, days off, or handling customer communications, businesses lend themselves to problems of cheating, fairness and misrepresentations. This is not to suggest developing detailed manuals, but rather identifying key areas of inconsistencies that can cause financial, reputation or stakeholder harm, and then developing proactive communication to avoid potential ethical misconduct.

Implement a formal system to handle potential ethical problems — Employees should know where they can go within the company if they have or notice an ethical dilemma, particularly if they believe they cannot go directly to their manager. If a business has a human resources department, that is a logical place to go if employees are concerned about the risks of “whistle blowing.” Some businesses have designated an ethics officer, a hot line, or a suggestion box to foster an environment of integrity. Whatever approach is taken, employees must be assured that they will not suffer negative consequences for consulting with appropriate parties to discuss their concerns.

Conduct behavioral interviewing with potential employees — How do you hire employees who are ethical? Unfortunately, there are no valid and reliable “ethical behavioral” tests. Some businesses have job prospects take written exams that include questions addressing fictional ethical dilemmas; others ask those questions in interviews. These approaches may provide insights into a potential hire’s ethical reasoning and decision-making. While no one can guarantee a recruit’s future ethical behavior, the processes described above will help integrate him or her into the ethical climate of the business.

Building a foundation
Incorporate ethical behavior into performance expectations — This is a very new area. To ensure that the values of the organization are aligned with an employee’s conduct, ethics could be included as part of the performance appraisal process. Employees then become accountable not just for achieving business results, but also for how they went about accomplishing them.

Provide employees with mentors — One way to help employees in ethical decision-making is to provide them with colleagues who can offer advice and support. This can be done by establishing a formal system of mentors, or by actively encouraging employees to seek out others within the organization.

Hold periodic employee training sessions — Learning about ethics within a business context is an ongoing process. Holding periodic employee meetings where they can learn from one another about ethical dilemmas they faced and how they were resolved, situations where they should not push boundaries, and how to talk about ethical issues with others, can be invaluable in developing a collective ethical identity.

Identify and develop ethical leaders — As your business identifies employees who “do the right things,” the company should highlight their performance, reward them and promote them as role models to others.

Commitment to an ethical climate
Respond quickly to reports of unethical behavior — Investigate, and if confirmed, work to resolve them. You will want to do this, not only to reinforce a climate of ethics, but to prevent any possible escalation of an unaddressed ethical problem.

Establish and follow through with consequences for both positive ethical behaviors and misconduct — Reward employees who demonstrate sound ethical behavior, and be clear on the consequences if employees violate a law or policy, are deceptive in their dealings with others, do creative but dangerous manipulation of data or information, etc. Rewards and punishments can be tangible or intangible, but they must be consistent and appropriate to the potential or actual harm that results from the situation at hand.

Monitor ethical activity — If possible, do ethical audits. Like any business-result area, measurement is fundamental. One can accomplish this through looking at the number of ethical instances reported, doing a survey, compliance reports, etc.

Keep up to date on laws and compliance issues — Ensure that managers are current on any revisions.

CEOs have to be the ethical leaders. They need to stand for and drive the values they want their business to be known for as it succeeds in its performance. To do this, they must be clear on what their values are, communicate them regularly, establish checks and balances to ensure value commitment, and reinforce a culture of integrity. This is not an easy process, but it is a necessary condition toward building an ethical climate. And this is the ultimate leadership challenge.

Dale Kalika is a lecturer and Barbara Keats is an associate professor in the department of management in the W. P. Carey School of Business at Arizona State University. They are conducting research on Generation Y, their entrance into the work force, and ethical decision-making.